House Rental - tax on unearned income??

bex_collins

My friend is about to start renting out her house. I told her that she will have to pay tax on the rent she receives - is this correct? If so how would she go about it?

Premier_2

She will need to pay tax the the profit from any rental income

This will need to be declared on her annual tax return. If she doesn't normally receive an annual tax return, she should contact her tax office and request one, specifically with the property section included.

bex_collins

When you say the profit - do you mean any amount over her monthly morgage? - If so does that mean that if the rent she will be receiving is below the amount she pays that she will not have to pay anything? (this will be the case)

N79

bex_collins wrote: »

When you say the profit - do you mean any amount over her monthly morgage? - If so does that mean that if the rent she will be receiving is below the amount she pays that she will not have to pay anything? (this will be the case)

Only mortgage interest is tax deductable

bex_collins

Sorry N79 - i'm not very good on tax things - can you clarify what you mean by the above?

Premier_2

Letting a property is effectively a business and, like any business, you need to compile accounts for that business. That will show you what profit is being made.

With regards interest, well unless the mortgage is an interest only mortgage, then the monthly payment will include the interest due plus a repayment of some of the capital. Typically most repayment mortgages allow for repayment of the capital over 25 years - but be careful, it's not constant. At the beginning of a mortgage most of the payment goes towards interest; at the end of the mortgage most of the payment goes towards capital repayment.

Other expenses that can be allowed against earnings (rental income) include:
Costs incurred when travelling to and from the investment property
Advertisement costs
Letting agents fees
Telephone calls made in connection with the property
Cost of safety certificates
Insurance
Subscription to property investment related magazines, products and services
Advisory fees e.g. legal and accountancy

Since such accountancy fees are allowable, it may be worthwhile spending a couple of hundred quid on an accountant - a good one will probably save more than that in tax avoidance.

N79

bex_collins wrote: »

Sorry N79 - i'm not very good on tax things - can you clarify what you mean by the above?

Bex please don't take this the wrong way - it is kindly meant.

While you do not need to understand the above if your friend has done such a small amount of research into being a LL and their obligations that she does not even know that she has to pay tax on rental profits then they should thing twice before renting out their property.

I would suggest to your friend that they read a few books, the relevant acts of parliament and that they join a LL association such as the NLA (which is also tax deductable). Only then should they consider renting out property

keeprenting

bex_collins wrote: »

My friend is about to start renting out her house. I told her that she will have to pay tax on the rent she receives - is this correct? If so how would she go about it?

By "renting out her house," do you mean a room in the house where she herself also lives? If so, tax relief may be available (although, depending on how much she is charging, she may still have some tax to pay).

Otherwise, I agree with the earlier answers - she will probably have to pay tax on her profit (rent received less deductible expenses, and deductible expenses include mortgage interest payment but not repayment of capital).

cliverowland

I found this looking up something else but nobody has mentioned the 10% 'Wear and Tear' allowance. Although the idea of it is to allow for wear on items in furnished flats it can still be claimed for unfurnished flats as they have carpets and curtains and a few other 'wearables'.
The idea is simply an allowance of 10% of the gross rent- very simple.

Pennywise

cliverowland wrote: »

I found this looking up something else but nobody has mentioned the 10% 'Wear and Tear' allowance. Although the idea of it is to allow for wear on items in furnished flats it can still be claimed for unfurnished flats as they have carpets and curtains and a few other 'wearables'.
The idea is simply an allowance of 10% of the gross rent- very simple.

Can't be claimed for an unfurnished property. See HMRC manual.

"The wear and tear allowance is calculated by taking 10% of the net rent received for the furnished residential accommodation."

"A furnished property is one that is capable of normal occupation without the tenant having to provide their own beds, chairs, tables, sofas and other furnishings, cooker etc. The provision of nominal furnishings will not meet this requirement. If the accommodation isn’t furnished, or only partly furnished, the 10% wear and tear allowance isn’t due."

You have been misinformed if you were told that the 10% ear and tear allowance is available just by having carpets and curtains as it is clearly contrary to the HMRC manual on the subject.